1099-S Received sale of Easement

[JackieCPA]

Hello!

A client received a 1099-S for the sale of an easement for farm land owned. He still owns a major portion of the land. Does this still qualify to be a deffered sale? How would I report the 1099-S on the tax return showing no income? Some google searching I have done says that you don't report it, and wait for a letter from the IRS about the 1099-S and then explain in a letter. That just seems like more of a hassle then anything?

[Lee B]

It depends on the facts and circumstances, it could be a reduction in basis or it could be a capital gain.

[Abby Normal]

Was an appraisal done? I only researched this topic once but I recall that of it was sold for less than FMV, it can result in a charitable deduction, too.

 

[jklcpa]

What type of easement and with whom?  Was this a voluntary transaction or involuntary conversion?

[Lee B]

NEI

 

Mod edit:  acronym means "not enough information"

Edited November 21, 2019 by jklcpa
clarify

[DANRVAN]

As others have posted it depends on the facts and circumstances.

First you have to determine if it is actually an easement not subject to terms of reversion.

An easement is considered a sale if grantor basically ends up without any rights to use the property.

On the other hand, if the easement has minimal effect on the landowners use of the land, it is considered a return of capital and reduces basis.

But here is the catch.  In most situations, the reduction in basis only applies to the portion of the land which includes the easement.  So if the easement covers one acre out of 100 acres,  only the basis of one acre is reduced.  Therefore the amount of payment that exceeds the basis of the land specific to the easement is gain.

There are a few court cases where basis reduction was applied beyond the property that was directly effected by the easement.

22 hours ago, TaxPreparer said:

Does this still qualify to be a deffered sale?

1033 can apply in the case of involuntary conversion.  Also in cases where replacement property is purchased due to severance damage.

 

22 hours ago, TaxPreparer said:

How would I report the 1099-S on the tax return

I reported the sale price and related basis reduction to head off an IRS letter.

[jklcpa]

Agree completely with Dan's post above.   I have also reported the sale and related basis reduction as he mentioned and never heard from IRS.  I also kept a note of the basis reduction in a permanent file and as a brief note/reminder in my tax program that would carry forward with each subsequent year.  

[DANRVAN]

 

On 11/20/2019 at 9:48 AM, TaxPreparer said:

He still owns a major portion of the land

Here are some references you might want to look at:

rev rul 72-255

rev rul 70-510

Inja Land Co...

Gilbertz...